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#FY20 H1 Results
Last edited 5 months ago

24-Feb-2020:  On a day on which the ASX 200 dropped 161 points and the All Ords Index fell 165 points, it was interesting to see that the only stocks in the ASX100 index that finished the day in the green were our 3 largest gold miners - NCM +5%, NST +3.3% & EVN +1.1%.  The other 97 stocks in the ASX100 all fell.  Our 4th largest gold miner, Saracen Minerals (SAR) also rose (by +7.4%) but they're not in the ASX100 (yet - will likely be added at the next rebalance).  There were a few more positive movers in mid-caps and small-caps (and also in micro-caps and nano-caps) and many of those were also gold miners - or are associated with gold mining.  One such company is Macmahon (MAH) who are a mining services companny.  Most of their clients happen to be gold miners and MAH specialise in gold and copper mining, both open-pit and underground.  They reported their first half results today (and hit a 12-month high [intra-day] of 31 cps) before closing bang on my target price for them (my valuation) of 30 cents (up one cent or +3.45% for the day):

2020 Half Year Results ASX Announcement

2020 Half Year Results Investor Presentation

Interim Financial Report 31 December 2019

Appendix 4D

They deserved to be bid up against a falling market.  It was a great set of numbers, and it was accompanied by a guidance upgrade as well:

Macmahon reports strong result, upgrades FY20 guidance:

  • Revenue of $686.7m, up 27% (1H19: $542.2m)
  • Underlying EBITDA(*1) of $114.0m, up 28% (1H19: $89.1m)
  • Underlying EBIT(A)(*2) of $44.1m, up 11% (1H19: $39.9m)
  • Statutory Net Profit After Tax (NPAT) of $28.7m, up 22% (1H19: $23.6m)
  • Operating cash flow(*3) of $90.7m, up 162% (1H19: $34.6m)
  • Gearing(*4) at 18.6%
  • Interim dividend – 0.25cps (30% franked)
  • Order book of $4.5bn(*5) and tender pipeline of over $7bn
  • FY20 guidance(*6) increased:
    • Revenue $1.3bn – $1.4bn (from $1.2bn - $1.3bn)
    • EBIT(A) $85m – $95m (from $80m to $90m) 

Notes:

*1. Underlying EBITDA is earnings before interest, tax, depreciation and amortisation from continuing operations, share based payments and M&A transaction costs. A reconciliation of Non-IFRS financial information is contained on slide 27 of the Company’s half year results presentation. 

*2. Underlying EBIT(A) is earnings before interest and tax from continuing operations, share based payments and M&A transaction costs and GBF amortisation of customer contracts.

*3. Net operating cash flow excluding interest and tax and M&A costs  

*4. Gearing = Net Debt / (Net Debt + Equity)

*5. Includes Silver Lake LOI  (Letter Of Intent)

*6. Guidance assumes an exchange rate of AUD:USD 0.70 and excludes one-off items and amortisation related to the GBF acquisition.  


Macmahon Holdings Limited (ASX:MAH) (‘Macmahon’ or ‘the Company’) has delivered another strong result for the six months ended 31 December 2019 as it continues to deliver on its long-term order book. 
 
Revenue grew by 27% over the prior corresponding period to $686.7 million, driven by increased activity across the Company’s projects in Australia and Indonesia, the 5-month contribution of the recently acquired underground contractor GBF Group, and successful ramp up at the Boston Shaker project. 
 
Underlying EBITDA increased by 28% to $114.0 million and underlying EBIT(A) increased to $44.1 million, which flowed through to a 22% improvement in Statutory Net Profit After Tax of $28.7 million (1H19: $23.6 million).  
 
Cash Flow, Balance Sheet and Dividends 
 
The Company’s focus on working capital management led to a significant improvement in cash conversion during the period. Macmahon generated operating cash flow (excluding interest, tax and M&A costs) of $90.7 million, representing a conversion rate from underlying EBITDA of 79.5%. Macmahon expects further improvement in cash conversion in the second half of FY20 in line with its full year target of 85%. 
 
Capex over the period was $69.9 million. For the full year, capex is expected to increase from $110m to $155 million to support the growth of existing and new contracts, and the adoption of mining technologies such as automated drills.

Macmahon maintained its robust balance sheet position, with gearing of 18.6%, cash on hand of $114.2 million, and net debt of $106.8 million at 31 December 2019. In addition, 60% of the Company’s property, plant and equipment is subject to put and call options and/or used in life of mine (LOM) contracts.

--- continued in "FY20 H1 Outlook" Straw ---  (which also contains commentary from MAH management on the result).

Disclosure:  I do hold MAH shares, and also NST, EVN & SAR shares (mentioned at the top).  Another company that reported today that also predominantly has gold miners for clients is MACA (MLD, i.e. most of their clients are also gold miners, as most of MAH's are), and their result wasn't quite as outstanding as MAH's was, however MLD held up pretty well - only falling by 1 cent (or -1% to $1.015), but that's another story.

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#New Work Pipeline
Added 2 days ago

03-Aug-2020:  STA: Award of Coburn Civil Bulk Earthworks Construction Pack

Strandline prepares for construction at Coburn with appointment of bulk earthworks contractor

Appointment of Macmahon (MAH) to establish road access and bulk earthworks marks completion of another key condition required to finalise project funding

HIGHLIGHTS

  • Strandline awards ~$23m contract to leading civil and mining contractor Macmahon to construct road access and bulk earthworks at its Coburn mineral sands project in WA
  • The scope includes construction of a 43km access road connecting the mine with the North West Coastal Highway, installation of other site roads, bulk earthworks pads, dams and drainage
  • The award of this contract is completed as one of Strandline’s debt finance conditions precedent and follows the completion of sufficient detailed design and a competitive tender process
  • Awarding this contract follows the recent investment decision by the Northern Australia Infrastructure Facility (NAIF) to provide a A$150m loan facility for the development of Coburn
  • Strandline is moving to finalise the balance of project funding and prepare for mobilising construction activities

--- click on the link above for the full Strandline (STA) announcement ---

[I hold MAH shares, but not STA shares]

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#Business Update
Last edited 2 months ago

04-June-2020:  MAH awarded $700m Byerwen Contract and affirms guidance

Highlights:

  • Macmahon secures expansion and extension of successful Byerwen contract
  • New contract extends to November 2023 with forecast revenue of $700 million, plus 2 year option
  • On track to deliver FY20 guidance of $1.3 billion - $1.4 billion revenue and $85 million - $95 million EBIT(A) (see note #1)
  • Work in hand for FY21 now exceeds $1.2 billion 

Byerwen Contract Award  
 
Macmahon Holdings Limited (MAH) is pleased to announce it has secured an expansion and three year extension of its work at the Byerwen coking coal mine in Queensland’s Bowen Basin. 
 
Macmahon has been providing open cut mining services at Byerwen since the establishment of the mine in November 2017, and employs more than 430 people on site. The mine is owned by Byerwen Coal Pty Ltd, a joint venture between QCoal Group and Japanese steel manufacturer, JFE Steel. 
 
The new contract significantly expands production to 10 million tonnes of hard coking coal per annum, and applies from 1 June 2020 until 1 November 2023. The expected revenue over the contract period will be $700 million, with full capacity expected from July 2020. There is also an option to extend the contract for a further two years after this period. If this option is exercised, revenue from the contract could exceed $1 billion. 
 
The expansion will involve capital expenditure by Macmahon of $16 million on ancillary equipment. Macmahon has also procured two additional 800 tonne hydraulic excavators for the project worth $37 million, however these machines are subject to a put and call option with Byerwen Coal, and so are not recognised on Macmahon’s balance sheet. 
 
Macmahon CEO and MD Michael Finnegan said: 
 
“We are very pleased to have secured this expansion and extension at Byerwen, which is one of our cornerstone projects in Australia. Byerwen Coal is an excellent partner and the project has been very successful since its inception. We look forward to continuing to work with our client on the development of this premium asset.” 
 
QCoal Group Managing Director Christopher Wallin said it was very satisfying to be able to confirm increased production from the Byerwen mine, which was a testament to the favourable economics of the project and the work of the QCoal staff and contract partners involved in developing the mine over several years. 

“The development of the Byerwen project is a great success story for the industry, with the mine now emerging as a very low cost producer of hard coking coal. I am very proud that this expansion will enable us to further contribute to the Queensland economy with additional local employment and opportunities for regional communities,” he said.  

Business Update 
 
Following its ASX announcement on 3 April 2020, Macmahon wishes to confirm that the impact of COVID-19 on its overall financial performance this year continues to be minimal.  
 
The Company is continuing with a range of operational measures to protect the health of its people and minimise the risk of transmission, however these measures are now well embedded and are not significantly disrupting day to day operations. 
 
As a result, Macmahon’s overall financial performance for FY20 remains in line with preCOVID-19 expectations, and the Company is on track to finish the financial year within its upgraded FY20 guidance of $1.3 - $1.4 billion of revenue, and $85 - $95 million of EBIT(A) (see note #1).  
 
Further, today’s confirmation of the Byerwen expansion and extension increases the Company’s work in hand for FY21 by approximately $115 million to over $1.2 billion, excluding expected revenue from civil and short term underground services churn work which has recently been around $120 million per annum. Macmahon considers this platform of secured work provides a solid basis for the year ahead, and will provide formal guidance for FY21 following the release of its full year results.  
 
Commenting on this performance and outlook, Mr Finnegan said: 
 
“I am very happy with the way our projects and our people have performed over the past few months, and with the fact we were able to pay an interim dividend in April as originally planned. With this track record, our strong balance sheet, significant tender pipeline and today’s announcement of the Byerwen award, I am optimistic we will be able to continue to deliver in FY21.” 

Note #1:  Guidance assumes an exchange rate of AUD:USD 0.70 and excludes one-off items and amortisation related to the GBF acquisition.  

--- ends ---  [click on link above for full announcement]

About Macmahon:  Macmahon is an ASX listed company offering the complete package of mining services to miners throughout Australia and Southeast Asia. 

Macmahon’s extensive experience in both surface and underground mining has established the Company as the contractor of choice for resources projects across a range of locations and commodity sectors.

Macmahon is focused on developing strong relationships with its clients whereby both parties work in an open, flexible and transparent way to ensure mutually beneficial outcomes whilst also minimising risks for both parties. 

Visit www.macmahon.com.au for more information. 

 

Disclosure:  I hold MAH shares.

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#Business Update
Added 4 months ago

3-Apr-2020:  Business Update from MAH

Guidance maintained, Dividend paid, All good so far.

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#FY2020 H1 Outlook
Last edited 5 months ago

24-Feb-2020:  Macmahon's (MAH's) Results are in the "Results" straw - this straw contains their outlook statements and their management's comments on their results:

Full Year Outlook 

Given the Company’s strong first half result and the work already in hand for the second half, Macmahon has upgraded its full year FY20 guidance. Revenue is now expected to be $1.3 – $1.4 billion (up from $1.2 – $1.3 billion), and EBIT(A) is now expected to be $85 – $95 million (up from $80 - $90 million).  
 
Commentary 
 
Commenting on the first half and the outlook for the Company, Macmahon’s Chief Executive Officer and Managing Director Michael Finnegan said: 
 
“Macmahon has produced a strong first half result and I am pleased to be able to upgrade our guidance for the full year.  
 
The first half was an important period for the business with the completion of the GBF acquisition, the appointment of two new non-executive directors, and the resolution of the Telfer dispute. Pleasingly, the integration of GBF is progressing to plan, and we are now captitalising on the opportunities in that business as seen in our recent announcement about the extension and expansion of contracts with Silver Lake Resources.   
 
Our focus will continue to be on optimising the safe delivery of our order book and converting more of the opportunities in our tender pipeline. This will be supported by our continued investment in people, mining technology and ongoing digital transformation. Our GBF acquisition will also assist in making Macmahon a more diverse and less capital intensive business, with greater scale in the underground market. 
 
With a workforce of more than 7,000 people (including contractors), a solid balance sheet, significant order book of $4.5 billion and tender pipeline of over $7 billion, we are well positioned for further growth.” 

 
 
*** ENDS ***

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#Reports and Presentations
Added 2 months ago

16-June-2020:  ASX CEO Connect June 2020 Presentation 

That link will take you to the Presentation slide pack that will be used by Macmahon (MAH) CEO & MD, Michael (Mick) Finnegan today at the ASX CEO Connect event.  For more information on ASX CEO Connect, click here.

Disclosure:  I hold MAH shares.

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#New Work Pipeline
Added 3 months ago

30-Apr-2020:  STA: Macmahon appointed as Preferred Mining Contractor for the Strandline Resources Coburn mineral sands project in WA  

Strandline (STA) advancing major execution contracts as part of project financing and in readiness for construction.

HIGHLIGHTS:

  • Early contractor involvement (ECI) agreement executed with Macmahon Holdings relating to mining services contract for Coburn project
  • Under the mining services contract, Macmahon will provide and operate the large mining fleet associated with ore mining, overburden removal, pit backfill and land recontouring 
  • Macmahon is a well-established leading mining contractor, with significant experience in the Australian resources sector, including in mineral sands
  • ECI agreement contains a detailed term sheet for an alliancing-style commercial framework with gain-and-pain share metrics linked to cost and performance targets
  • Terms of the ECI agreement are based on the mine plan, methodology and productivity pricing assumptions contained in the Coburn DFS
  • This agreement follows the completion of major binding offtake contracts with some of the world’s leading consumers across Europe, America and China (see ASX releases by STA on 20 April 2020)  
  • With the DFS completed and key development approvals already in place, Coburn is development-ready pending finalisation of project financing 

--- click on link above for more ---

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#FOR on MAH, March 2020
Last edited 4 months ago

27-Mar-2020: Livewire: "Buy Hold Sell: 5 cash earners for a crisis" with Steve Johnson (Forager Funds) and Ben McGarry (from Totus Capital)

Steve tips MAH at around the 3:30 mark as his pick for a company that is going to produce some sustainable cashflow through this cycle.  MAH is in Forager's Australian Shares Fund (ASX: FOR) and Steve explains why.  I also hold MAH and I'm bullish that they'll get through this better than many other mining services industry participants due to their clients and the nature of their contracts (multi-year and often life-of-mine contracts, i.e. long term).  Ben's tip is Objective Corp (OCL).

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#Bull Case
Added 5 months ago

20-Mar-20:  I've written plenty on MAH, so I'll keep this brief.  They've been sold down from 30c to 18c, on poor sentiment and fund redemptions.  However, the vast majority of their clients are gold miners, they have long-term (multi-year) contracts that are based on tonnes of ore processed (not linked to commodity prices), and excellent management.  Like with NWH (NRW Holdings), this is a great opportunity to buy a quality company at a significant discount to their intrinsic value.

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#Bull Case
Last edited 5 months ago

Some time in 2018 (before I started dating my straws): 

Macmahon (MAH) have new management (Mick Finnegan), a new major (Indonesian) shareholder, have fought off a takeover attempt by CIMIC (CIM), are Forager's (FOR's) largest holding in their Australian Equities fund, and have taken steps to fix all of their prior year issues, including the losses incurred at Newcrest's Telfer gold mine - which was probably one of their biggest issues.  There is heaps of upside if they can outperform on their biggest contract - which is the Batu Hijau contract (for their largest shareholder, PT AMNT).  They have a gain share/pain share agreement where the pain is limited to basic project costs, but the gain side is pretty much unlimited.  Basically, the downside is they could make nothing at all on Batu Hijau, if they underperform, and that would still be significant because that contract is massive - currently around half of their entire order book, but - importantly - they won't LOSE money on the contract (like they have been at Telfer - working for NCM).  The upside (the gain share) is significant however, and is not really priced in to the MAH SP at this point, in my opinion.  Mick Finnegan has plenty of experience working in Indonesia and PNG, and plenty of friends and industry contacts there, so they are not venturing out into the great unknown here.  

Steve Johnson at Forager wrote about MAH in their March Quarterly report (in April this year), and I'm going to try to post that in here in two posts (split due to the 2,500 character limit on posts).  For now, here's a small bit of it:

New contract wins, paired with extensions of existing contracts, have left the company in a fortunate position compared to some other mining services businesses: it doesn’t have to constantly win new work. For the next four-odd years, Macmahon has a lot of committed revenue.

Macmahon Revenue by Contract:

Contract, Remaining Contract Term (years), Annual  Revenue ($m)

Batu Hijau, 5, $530m
Tropicana, 6, $225m
Byerwen, 3, $117m
Telfer, 4, $80m
Mt Morgan, 5, $50m
Other, $100m
Total $1,102m ($1.1 billion)

Source: Macmahon and Forager Fund

 

 

Disclosure:  I own MAH shares.

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#Comment on MAH from FOR [Pt2]
Last edited 5 months ago

June 2018:  This is the 2nd straw of 2 - Comments from FOR about MAH in FOR's March 2018 Quarterly Report:

Recent wins in WA and Indonesia have grown the small underground mining business. Acquiring TMM Group in February has also pushed the business into civil work for mine sites, which fits in well with Macmahon’s other services.

New contract wins, paired with extensions of existing contracts, have left the company in a fortunate position compared to some other mining services businesses: it doesn’t have to constantly win new work. For the next four-odd years, Macmahon has a lot of committed revenue.

Macmahon Revenue by Contract:

Contract, Remaining Contract Term (years), Annual Revenue ($m)

Batu Hijau, 5, $530m
Tropicana, 6, $225m
Byerwen, 3, $117m
Telfer, 4, $80m
Mt Morgan, 5, $50m
Other, $100m
Total $1,102m ($1.1 billion)

[Source: Macmahon and Forager Fund]

The business has now come full circle on growth and capital expenditure. The half just gone saw $232m spent on equipment (including $183m of gear purchased from AMNT using shares), compared to only $27m last year.  More capital expenditure will be needed for current and future contracts.

Despite having people and expertise, Macmahon remains a business where capital expenditure on mining equipment is critically important. Spending on gear to grow is easy when times are good. But picking difficult contracts, or executing contracts poorly, can destroy profit margins and even cause losses. Telfer is a good reminder of what can go wrong. Macmahon needs to be careful.

By next year Batu Hijau and the two new contracts will be contributing earnings for the full year. If it executes well, without any new contract wins, the business should be generating close to $1.1bn in revenue and more than $85m of earnings before interest and tax. At the current price the business is trading around seven times after-tax earnings. Macmahon remains the largest position in the Australian Fund.

[Source: Forager Fund, March 2018 Quarterly Report]

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#Broker/Analyst Reports
Last edited 5 months ago

02-Mar-2019:  Moelis Australia have released an updated Broker/Analyst Report on Macmahon (post MAH's 1HFY19 results) which is available free via the "ASX Equity Research Scheme", and that report can be viewed here.

For more details on the scheme or to sign up for a free email every Friday afternoon with links in it to that week's free reports - see here.

Moelis rate MAH as a "Buy" with a target price of 30 cents, which is 27.7% above yesterday's 23.5 cent closing price.

Disclosure:  I hold MAH shares.

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#Results
Added 5 months ago

The following straw was written by me 6 months ago (the MAH FY19 FY results straw) - but for some reason stayed "private'.  I just unclicked the "private" button and it got published, but today, not 6 months ago...  Interestingly, they have delivered on their promises 6 months ago.

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#Results
Last edited 5 months ago

30-Aug-2019:  Busy day for MAH.  They have emerged from their trading suspension with the news that the recent negotiations with Newcrest (NCM) have been more positive and the most likely outcome now is that the remaining work at Telfer will be profitable for Macmahon as Newcrest are likely to increase the rates that they pay Macmahon for the work they do there.  MAH have therefore NOT made any provision for Telfer (onerous contract provision/write-down) in their FY19 accounts, which improves their numbers.

Speaking of numbers, they are good, and they've managed to reinstate their dividend payments as well, beginning with a half cent (30% franked) full-year dividend.  As an MAH shareholder, and a shareholder in Forager's ASF (ASX:FOR, which has MAH as one of their top 5 positions), I'm very happy with this report.  No nasty surprises, and plenty of positives.

Macmahon FY19 Results Release

Macmahon FY19 Investor Presentation

Macmahon 2019 Annual Report

Appendix 4E

Telfer Update

2019 Full Year Results Date and Conference Call Details

 

Macmahon delivers strong earnings uplift in FY19 and reinstates sustainable dividends:

  • Revenue of $1,103.0 million, up 55% (FY18: $710.3m) and above guidance
  • Underlying EBITDA  of $181.4 million, up 52% (FY18: $119.2m)
  • Underlying EBIT of $75.1 million, up 81% (FY18: $41.5m) and within guidance
  • Underlying EPS of 2.69cps, up 74% (FY18: 1.55cps)
  • Operating cash flow of $125.9 million, up 24% (FY18 $101.9m)
  • Robust balance sheet with low gearing at 10.5%
  • NTA of 20.3cps, up 8% (FY18 NTA 18.7cps)
  • Advanced negotiations to increase contract rates at Telfer – no onerous contract provision recorded
  • Reinstatement of dividends - FY19 final dividend of 0.5cps (partially franked)
  • Strong order book of ~$4.7 billion, providing considerable revenue visibility
  • FY20 revenue and earnings guidance of $1.2 billion - $1.3 billion revenue and $80 million - $90 million EBIT

“Consistent project execution has been a key focus for Macmahon and is driving a real transformation in Macmahon’s financial performance, with FY19 revenue more than triple what we achieved in FY17 and earnings moving from negative to strongly positive in that period. 

 
“This reliable performance and the good revenue visibility provided by our $4.7 billion order book has underpinned the Board’s decision to reinstate dividends to Macmahon shareholders.  The FY19 final dividend of 0.5 cents per share is the Company’s first dividend in seven years with the Board aiming to pay dividends on a sustainable basis going forward.” 

 
Cash Flow and Balance Sheet 
 
Macmahon generated operating cash flow (excluding interest, tax and settlement for the class action) of $125.9 million in FY19 (FY18: $101.9 million), representing a conversion rate from underlying EBITDA of 69.4%. The cash flow conversion was impacted by an increase in working capital due to delayed receipts from trade receivables of $24m slightly later than expected. Including payments from customers received in the first week of July 2019, the EBITDA conversion would increase to 82.6%. 
 
Macmahon maintained a robust balance sheet in the year, with gearing of 10.5% at 30 June 2019, cash on hand of $113.2 million, and net debt of $52.7 million. When factoring in the delayed receipts from clients, net debt and gearing is reduced to $28.7 million and 6.0% respectively.  
 
Outlook

 
The Company is well positioned for growth in FY20 with secured work in hand of $1.2 billion. The Company expects FY20 revenue of $1.2-1.3 billion, and EBIT of $80-90 million.  
 
Mr Finnegan said: “Over the past 12 months we have continued to position the business for growth, both organically and through the strategic acquisition of specialist underground contractor GBF Group. 
 
“These initiatives have been in line with our growth strategy to enable Macmahon to be a leading mining contractor that can service clients through the life cycle of their mining operations.  
 
“The acquisition of GBF, our $4.7 billion order book, and significant tender pipeline means the Company is well positioned to deliver further earnings and cash flow growth in FY20. 
 
“This growth is underpinned by consistent execution on our secured work in hand, and a tender pipeline of more than $7 billion in potential new revenue. This pipeline includes over $4.5 billion of projects where Macmahon is the preferred or exclusive tenderer. Many of these opportunities are with existing clients which, given our ongoing strong performance, puts us in a competitive position. 
 
“In FY20, our focus will be to integrate the GBF business, continue to execute our order book safely and secure new work, whilst leveraging our collaborative end to end offering to benefit our clients, people, and our shareholders. 
 
“These initiatives will be supported by continued investments in innovation and technology, and improving the capacity of our human resources through training, all aimed at strengthening both our service delivery and operating efficiency.”

 

--- click on links above for more ---

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#Broker/Analyst Reports
Last edited 7 months ago

19 June 2019:  Moelis Australia: Macmahon Holdings (BUY): GBF acquisition & Telfer update

EVENT:  MAH has agreed to acquire underground mining contractor GBF for $48m upfront + two potential earnout payments in FY20 and FY21. GBF is expected to generate revenue of $180m and EBITDA of $20m in FY20. The acquisition will be funded by existing cash and the assumption of GBF’s debt; target completion is mid-August 2019. MAH also recently flagged issues at its Telfer contract but reiterated FY19 underlying EBIT guidance of $70-80m and guided to “growth in underlying EBIT in FY20” (pre GBF acquisition).

IMPACT:  Telfer negotiation outcome expected by 5 August 2019. MAH is seeking a rate increase due to changes in the mine plan and remains confident on a positive outcome but should there be any delays, MAH has flagged the potential recognition of a $25-35m non-cash, onerous provision at its FY19 result, representing the future unavoidable costs (based on the current terms) until the expected completion of the contract in Jan 2023 (~$7-10mpa).

Headline GBF acquisition multiples appear attractive. The upfront acq. multiple is 2.4x FY20f EBITDA (~6x EBIT based on MAe) with potential to be reduced by the locked-box mechanism which provides MAH economic exposure to GBF from 1 Dec 2018 (not included in our estimates but conservatively estimated at ~$4m). Further, the earnout cap of $53.5m implies a total acquisition multiple of ~2.5x (or better) based on ~$40m EBITDA. No details were provided on individual contract tenure but our high level analysis suggests an average reserves-based mine life of ~2.4 yrs (6.4yrs on M&I resources). We also note that the upfront component represents “a small premium to NTA” which appears undemanding given the immediate access to mining fleet and skilled workforce. GBF’s FY20f EBITDA margin of 11% is lower than expected but it is understood that there is potential for margin improvement under a more efficient overhead structure.

Small increase to FY20e EBIT to $82m (prev: $81m) to reflect the acquisition offset by our conservative assumption of ongoing Telfer impact with potential upside to our #s from a favourable resolution at Telfer/acquisition synergies.

INVESTMENT VIEW:  The acquisition of GBF increases MAH’s exposure to the higher barrier to entry, underground service offering + provides earnings diversification. At 6.1x FY20e EV/EBIT, MAH appears undervalued – upcoming catalysts include: 1) resolution of Telfer issues; and 2) delivery of FY19 results in line with/ahead of expectations (cons. EBIT: $73m). Retain BUY & $0.30 TP.

--- end of excerpt from Moelis broker/analyst report ---

 

Disclosure:  I hold MAH.  I consider MAH to be one of the lower-risk mining services plays based on a number of long term contracts with clear earnings visability - but also with massive additional upside potential from their huge tender pipeline, of which they have been named as preferred tenderers for the majority of that $7 billion pipeline.  A large percentage of that pipeline is also with MAH's existing client base, giving them a definite advantage over their peers.  I view their pro-active approach to renegotiating the Telfer contract as a positive, as while Telfer isn't one of their bigger contracts, it has the potential to continue to be a minor drag on their earnings (i.e. loss making) into the future if they don't do something about it now.  Some have speculated however that if Macmahon were to make money at Telfer, Newcrest (the owners of the gold mine) would lose money - as Telfer is around breakeven for Newcrest currently, or just barely profitable.  Previous mining contractors there (prior to MAH) have simply walked out - quit the contract and left.  It's a very hard place to work - with a lot of challenges, and as NCM's least profitable mine, and one of their oldest, they are loathe to spend money there; the scuttlebutt I've heard from people who do shutdown work at Telfer (including one of my brothers) is that is barely functional, with loads of downtime, heaps of breakdowns, and usually band-aid fixes that just get them through to the next breakdown.  Newcrest's Sydney-based management just aren't very interested in Telfer, so Telfer lurches from one crisis to the next - and that's just the processing plant.  MAH would love to walk away from Telfer, but they've signed a life-of-mine contract - as they tend to do with many of their clients, so they're likely in it until the end (whenever that might be).

Further reading:  http://www.afr.com/business/mining/telfer-the-contract-macmahon-s-no-longer-wants-to-afford-20190616-p51y8k

If the numbers in that article are accurate, and MAH has been losing around $1m/month at Telfer, then it's little wonder that Mick Finnegan wants to renegotiate the terms of the contract.  Once Telfer is sorted out - one way or the other - I believe the market will then focus on the rest of MAH's contracts - which are all in very good shape - and their huge tender pipeline.

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#Outlook / Guidance
Last edited 8 months ago
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